Anyone who has spent time planning for retirement has likely tried to predict how much money they’re actually going to be spending once they stop full time work. Making a realistic retirement budget is a critical part of financial preparedness. Now, however, a new study is revealing that workers approaching retirement age are pretty far off the mark when it comes to accurately predicting retirement spending.
Retirement Spending Predictions Fail to Match Reality
We discovered this article on the NextAvenue website, written by financial editor Richard Eisenberg. The article, which was reprinted on several financial websites, cites a recent study by a financial firm called Hearts & Wallets revealing that retirees don’t spend their money the way they thought they would. This failure of our predictions to match reality can have a significant impact on our fiscal well-being, especially when we’re living on a fixed income. “Our ability to avoid outliving our money is, in large part, due to our expenses in retirement,” Eisenberg writes. “Turns out, a new study reveals, we’re pretty lousy at predicting how much we’ll actually spend on housing and health care when we retire.”
In the Hearts & Wallets study, researchers asked nearly 500 “late career” workers between the ages of 53 and 64 whether they believed they would spend more, less, or about the same in retirement than they were spending while working. At the same time, they asked almost 2,000 retirees about their actual retirement spending – was it more, less, or about the same compared with their pre-retirement outlay? It turns out that the perception among pre-retirees doesn’t really match the facts. “There were pretty striking differences between the predictions and the reality,” Eisenberg writes, “suggesting that pre-retirees in their 50s and 60s [should] get more serious projecting their expenses in retirement.” As it turns out, one of the critical areas where retirees found themselves spending significantly more than anticipated was in the category of housing.
Retirement Spending on Housing is Higher Than Expected – While Medical Costs are Lower
When researchers asked the pre-retirees about their expectations concerning housing costs, almost half said they anticipated spending less on housing in retirement. However, the reality of actual housing costs in retirement were not so rosy. “Only 30 percent of retirees surveyed actually are spending less on mortgages or rents and utilities than when they were working full-time,” said the NextAvenue report. “In fact, the survey said, most retirees spend the same or more on housing compared to before they retired.” (About one retiree in six finds themselves spending more; just over half report little change.) The study authors from Hearts & Wallets say that the reasons for this spending disconnect are, first, unrealistic expectations, and, second, changing preferences in housing once people retire. “Some pre-retirees, [the authors] noted, haven’t done the math about what they’ll likely spend on housing in retirement,” said Eisenberg. “Others may wind up not moving as they’d planned — either staying in their current home or moving to one that costs as much or more than where they’re now living.” Our take-away: It’s essential that we based our plans on realism, not fantasy.
If the projection about housing costs is unrealistically optimistic, the opposite appears true for health care costs – a somewhat comforting surprise, but also a bit of a mixed bag. “Although 38 percent of late-career respondents told Hearts & Wallets they expect to spend more on health care costs (not including health insurance premiums) in retirement, only 25 percent of retirees actually are spending more than before,” said Eisenberg. But when it comes to health insurance premiums, expectations of pre-retirees are a bit closer to reality. More than 70 percent of retirees are spending the same or less than expected. The Employee Benefit Research Institute’s May 2019 report on the spending patterns of older households reported that retirees spend between 11 and 13 percent of income on health care, while about 36 percent of the average retired couple’s income goes to housing. (For single retirees that figure is 47 percent.)
What’s the Best Way to Plan Your Retirement Spending?
Based on our experience here at AgingOptions with thousands of retirees, we have two recommendations when it comes to creating a financial plan that is both sound and accurate. First, sit down with a professional financial planner – not a broker or insurance agent with a product to sell – and create your own personalized financial dashboard. This invaluable tool will help you plan for every financial eventuality and allow you to make adjustments at various stages of your life, both while working and in retirement. If you’ll contact us, we’ll be pleased to refer you to a trusted adviser who will assist you in this important step.
Our second recommendation is to remember that there’s far more to planning for retirement than money. People heading towards retirement often make the mistake of thinking that a little financial planning is all that’s required, when in fact most financial plans are woefully inadequate. As the NextAvenue article points out, financial planning quickly involves your medical needs and your housing status, two areas of retirement that can quite suddenly knock your financial plan off course. But finances, health care and housing aren’t the end of the story for retirement planning. Are you adequately prepared legally for the realities of retirement and estate planning? And does your family understand and support your plans for the future as you age? These critical elements belong in the retirement mix.
The best way we know of to successfully blend all these facets together – finance, medical, housing, legal and family – is with a LifePlan from AgingOptions. We invite you to join the thousands who have discovered the power of LifePlanning by attending a free LifePlanning Seminar at a location near you. Invest just a few hours and you’ll come away with your eyes opened to a brand-new way to think about retirement. You’ll find a calendar of upcoming seminars here on our Live Events page – then you can register online or give us a call. Make certain your retirement planning is truly comprehensive and complete: come discover the power of an AgingOptions LifePlan. Age on!
(originally reported at www.nextavenue.org)